Financial Markets and Institutions Study Guide Questions
Course Introduction
This course provides an in-depth exploration of the structure, functions, and dynamics of financial markets and institutions. Students will learn about various financial instruments, including stocks, bonds, and derivatives, as well as the roles played by banks, investment firms, insurance companies, and regulatory bodies in the global financial system. Topics covered include the process of financial intermediation, risk management, monetary policy, interest rate determination, and the impact of technology and globalization on financial markets. Through case studies and real-world examples, the course equips students with the analytical tools necessary to understand and evaluate the functioning and stability of financial systems.
Recommended Textbook
Corporate Finance Asia 1st Global Edition by Stephen Ross
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Chapter 1: Introduction to Corporate Finance
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Q1) Which form of business structure faces the greatest agency problems?
A)sole proprietorship
B)general partnership
C)limited partnership
D)corporation
E)limited liability company
Answer: D
Q2) Agency costs refer to:
A)the total dividends paid to stockholders over the lifetime of a firm.
B)the costs that result from default and bankruptcy of a firm.
C)corporate income subject to double taxation.
D)the costs of any conflicts of interest between stockholders and management.
E)the total interest paid to creditors over the lifetime of the firm.
Answer: D
Q3) What advantages does the corporate form of organization have over sole proprietorships or partnerships?
Answer: The advantages of the corporate form of organization over sole proprietorships and partnerships are the ease of transferring ownership,the owners' limited liability for business debts,the ability to raise more capital,and the opportunity of an unlimited life of the business.
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Chapter 2: Financial Statements and Cash Flow
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Q1) Which one of the following statements concerning liquidity is correct?
A)If you sold an asset today,it was a liquid asset.
B)If you can sell an asset next year at a price equal to its actual value,the asset is highly liquid.
C)Trademarks and patents are highly liquid.
D)The less liquidity a firm has,the lower the probability the firm will encounter financial difficulties.
E)Balance sheet accounts are listed in order of decreasing liquidity.
Answer: E
Q2) What is the amount of the non-cash expenses for 2011?
A)$570
B)$630
C)$845
D)$1,370
E)$2,000
Answer: D
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Chapter 3: Financial Statements Analysis and Long-Term Planning
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Q1) An increase in which one of the following accounts increases a firm's current ratio without affecting its quick ratio?
A)accounts payable
B)cash
C)inventory
D)accounts receivable
E)fixed assets
Answer: C
Q2) Frederico's has a profit margin of 6%,a return on assets of 8%,and an equity multiplier of 1.4.What is the return on equity?
A)6.7%
B)8.4%
C)11.2%
D)14.6%
E)19.6%
Answer: C
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Chapter 5: Net Present Value and Other Investment Rules
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Q1) All else equal,the payback period for a project will decrease whenever the:
A)initial cost increases.
B)required return for a project increases.
C)assigned discount rate decreases.
D)cash inflows are moved earlier in time.
E)duration of a project is lengthened.
Q2) A mutually exclusive project is a project whose:
A)acceptance or rejection has no effect on other projects.
B)NPV is always negative.
C)IRR is always negative.
D)acceptance or rejection affects other projects.
E)cash flow pattern exhibits more than one sign change.
Q3) Discuss how frequently publicly traded firms use different capital budgeting tools.
Q4) An investment is acceptable if its IRR:
A)is exactly equal to its net present value (NPV).
B)is exactly equal to zero.
C)is less than the required return.
D)exceeds the required return.
E)is exactly equal to 100%.
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Chapter 8: Interest Rates and Bond Valuation
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Q1) The rate of return required by investors in the market for owning a bond is called the: A)coupon.
B)face value.
C)maturity.
D)yield to maturity.
E)coupon rate.
Q2) The nominal rate of return on the bonds of Steve's Boats is 8.75%.The real rate of return is 3.4%.What is the rate of inflation?
A)5.17%
B)5.28%
C)5.35%
D)5.43%
E)5.49%
Q3) One basis point is equal to:
A).01%.
B).10%.
C)1.0%.
D)10%.
E)100%.
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Chapter 10: Risk and Return: Lessons From Market History
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Q1) Which one of the following is a correct ranking of securities based on their volatility over the period of 1926 to 2012? Rank from highest to lowest.
A)large company stocks,U.S.Treasury bills,long-term government bonds
B)small company stocks,long-term corporate bonds,large company stocks
C)long-term government bonds,long-term corporate bonds,small company stocks
D)small company stocks,large company stocks,long-term corporate bonds
E)long-term corporate bonds,large company stocks,U.S.Treasury bills
Q2) The long term inflation rate average was 3.2% and you invested in long term corporate bonds over the same period which earned 6.1%.What was the average risk premium you earned?
A)2.9%
B)3.1%
C)9.3%
D)9.4%
E)None of the above
Q3) What securities have offered the highest average annual returns over the last several decades? Can we conclude that return and risk are related in real life?
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Chapter 11: Return and Risk: the Capital Asset Pricing Model
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Q1) You recently purchased a stock that is expected to earn 25% in a booming economy,9% in a normal economy and lose 8% in a recessionary economy.There is a 15% probability of a boom,a 65% chance of a normal economy,and a 10% chance of a recession.What is your expected rate of return on this stock?
A)7.65%
B)8.05%
C)8.67%
D)8.83%
E)9.00%
Q2) Your portfolio is comprised of 30% of stock X,50% of stock Y,and 20% of stock Z.Stock X has a beta of .64,stock Y has a beta of 1.48,and stock Z has a beta of 1.04.What is the beta of your portfolio?
A)1.01
B)1.05 C)1.09 D)1.14 E)1.18
Q3) The diagram below represents an opportunity set for a two asset combination.Indicate the correct efficient set with labels;explain why it is so.
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Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Q1) Suppose the Carz Corporation's common stock has a beta of 0.9.If the risk-free rate is 3.5% and the expected market return is 9%,the expected return for JumpStart's common stock is:
A)3.5%.
B)8.45%.
C)9.00%.
D)9.15%.
E)9.24%.
Q2) What would the stock's total return be if the actual growth in each of the factors was equal to growth expected? Assume no unexpected news on the patent.
A)4%
B)5%
C)6%
D)7%
E)8%
Q3) Explain the conceptual differences in the theoretical development of the CAPM and APT.
Q4) Discuss the Fama-French three factor model;both what it means and the factors of the model.
10
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Chapter 14: Efficient Capital Markets and Behavioral Challenges
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Q1) Efficient capital markets are financial markets:
A)in which current market prices reflect available information.
B)in which current market prices reflect the present value of securities.
C)in which there is no excess profit from using available information.
D)All of the above.
E)None of the above.
Q2) The average serial correlation,which indicates if there is a relationship between yesterday's return and today's return for the 100 largest companies is
A)positive,and large
B)not possible to calculate
C)zero
D)positive,but small
E)negative,but small
Q3) If the weak form of efficient markets holds,then:
A)technical analysis is useless.
B)stock prices reflect all information contained in past prices.
C)stock prices follow a random walk.
D)All of the above.
E)None of the above.
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Chapter 15: Long-Term Financing: an Introduction
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Q1) Corporate financial officers prefer to use book values when measuring debt ratios because:
A)book values are more stable than market values.
B)debt covenant restrictions are usually expressed in book value terms.
C)rating agencies measure debt ratios in book values terms.
D)All of the above.
E)None of the above.
Q2) Preferred stock may exist because:
A)losses before income taxes prevent a company from enjoying the tax advantages of debt interest while there is no tax advantage for preferred dividends.
B)an advantage exists for the firm;preferred shareholders cannot force the company into bankruptcy because of unpaid dividends.
C)corporations get a 70% tax exemption on preferred dividends received.
D)All of the above.
E)None of the above.
Q3) Preferred Stock,as a hybrid security,presents somewhat of a puzzle as to why they are issued.What elements give rise to the puzzle and how is it explained?
Q4) From this information,calculate Eaton's book value per share.
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Chapter 20: Raising Capital
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Q1) What are venture capitalists and what is their role in raising capital for firms?
Q2) Dilution refers to:
A)the increase in stock value due to wider ownership of stock.
B)the loss in existing shareholder's equity.
C)the loss in new shareholder's equity.
D)the loss in all shareholder's equity,both existing shareholders and new shareholders.
E)None of the above.
Q3) If a shareholder or investor wants to acquire new stock under a rights plant they must:
A)acquire new stock in the market to get a controlling fraction of shares to be eligible for rights.
B)simply pay a registration fee and turn in the subscription price.
C)acquire the correct rights per share desired,then turn the rights and the total subscription price into the subscription agent.
D)acquire the correct rights and wait for the company to send you the stock.
E)call their broker and sell some CBOE options to make any money.
Q4) Discuss what a Dutch auction is and how it works.
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Chapter 22: Options and Corporate Finance
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Q1) The value of a call increases when:
I.the time to expiration increases.
II.the stock price increases.
III.the risk-free rate of return increases.
IV.the volatility of the price of the underlying stock increases.
A)I and III only
B)II,III,and IV only
C)I,III,and IV only
D)I,II,and III only
E)I,II,III,and IV
Q2) You purchased four WXO 30 call option contracts at a quoted price of $.34.What is your net gain or loss on this investment if the price of WXO is $33.60 on the option expiration date?
A)-$1,576
B)-$136
C)$1,304
D)$1,440
E)$1,576
Q3) How do options apply to capital budgeting? Explain and give an example.
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Chapter 23: Options and Corporate Finance: Extensions and Applications
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Q1) Rejecting an investment today forever may not be a good choice because:
A)the size of the firm will decline.
B)there are always errors in the estimation of NPVs.
C)the option value is negative.
D)the company's foregoing the future rights or option to the investment.
E)None of the above.
Q2) If Mr.Maxim earned $500,000 in regular annual salary why might he prefer to have $1,500,000 in straight salary versus salary and options?
Q3) Which of the following statements is true?
A)The Black Scholes model is the simplest to use and best used for complex situations.
B)The binomial model does not handle options with dividend payments prior to expiration date.
C)The Black Scholes model adequately handles the valuation of an American put.
D)The binomial model is better for complex situations and is the simplest tool to use.
E)The Black Scholes model is simpler to use,but for complex situations,the binomial model is the necessary tool.
Q4) What is the value of Mr.Maxim's options?
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Chapter 24: Warrants and Convertibles
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Q1) If all warrants are exercised,what will your fraction of ownership be if you owned 20,000 shares originally?
A)12.12%
B)13.07%
C)13.33%
D)14.04%
E)Without knowing the exercise price the percent cannot be determined.
Q2) A convertible bond has an option value which is equal to:
A)the market value of the convertible bond minus the straight bond value.
B)The market value of the convertible bond minus the conversion value.
C)the market value of the convertible bond minus the conversion premium.
D)the market value of the convertible bond minus the maximum of the straight bond value or conversion value.
E)None of the above.
Q3) What is the conversion price?
A)$25.00
B)$33.33
C)$35.00
D)$1,000.00
E)No conversion premium is given.
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Chapter 25: Derivatives and Hedging Risk
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Q1) Hedging in the futures markets can reduce all risk if:
A)price movements in both the cash and futures markets are perfectly correlated.
B)price movements in both the cash and futures markets have zero correlation.
C)price movements in both the cash and futures markets are less than perfectly correlated.
D)the hedge is a short hedge,but not a long hedge.
E)the hedge is a long hedge,but not a short hedge.
Q2) A bank has a $80 million mortgage bond risk position which it hedges in the Treasury bond futures markets at the Chicago Board of Trade.Approximately how many contracts are needed to be held in the hedge?
A)8
B)80
C)800
D)8,000
E)80,000
Q3) Duration is defined as the weighted average time to maturity of a financial instrument.Explain how this knowledge can help protect against interest rate risk.
Q4) Calculate the duration of Tiger State Bank's assets and liabilities.
Q5) What new asset duration will immunize the balance sheet?
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Chapter 31: International Corporate Finance
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Q1) Which of the following statements are correct concerning the foreign exchange market?
I.The trading floor of the foreign exchange market is located in London,England.
II.The foreign exchange market is the world's largest financial market.
III.The four primary currencies that are traded in the foreign exchange market are the U.S.dollar,the British pound,the Canadian dollar,and the euro.
IV.Importers and exporters are key players in the foreign exchange market.
A)I and III only
B)II and IV only
C)I and II only
D)III and IV only
E)I and IV only
Q2) The exchange rate on a spot trade is called the _____ exchange rate.
A)spot
B)forward
C)triangle
D)cross
E)open
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